Federal Agricultural Mortgage Corp (AGM) 2011 Q4 法說會逐字稿

Good morning and welcome to the Farmer Mac fourth quarter and fiscal year 2011 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions).

After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded.

And I would now like to turn the conference over to Michael Gerber, CEO. Please go ahead.

Thank you, Emily, and good morning everybody. I am Mike Gerber the, President and CEO of Farmer Mac. And the Farmer Mac management team and I are pleased to welcome you to our fourth quarter 2011 investor conference call.

Before we begin this morning, I'll ask Jerry Oslick, Farmer Mac's General Counsel, to comment on forward-looking statements that may be made today.

Thanks, Mike. In addition to historical information, this conference call may include forward-looking statements that reflect Management's current expectations for Farmer Mac's future financial results, business prospects, and business developments. Management's expectations for the Corporation's future necessarily involve a number of assumptions and estimates, and evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac's actual results to differ materially from the expectations as expressed or implied in these statements.

Some of these factors and events are identified in our press release issued yesterday and (technical difficulty) made by Farmer Mac during this call represent Management's current expectations. Farmer Mac undertakes no obligation to release publicly the results of revisions to any such forward-looking statements to reflect any future events or circumstances, except as otherwise mandated by the SEC. A recording of this call will be available on our website after the conclusion of the call.

Thank you, Jerry. We are pleased to share with you Farmer Mac's 2011 results. These results reflect another strong year at Farmer Mac.

Highlights that include core earnings, which continue on an upward trend despite slower demand for loans by rural borrowers, growth in capital as a result of positive GAAP earnings, and lower 90-day delinquencies compared to both the previous year -- I'm sorry, the previous quarter and the prior year. Him

Farmer Mac's fourth-quarter earnings were $12.6 million compared to $6.7 million for fourth quarter 2010. For the full year, core earnings were $42.9 million compared to $25.4 million in 2010. That is a 69% increase.

GAAP net income for fourth quarter 2011 was $13.3 million compared to $12.5 million for the fourth quarter 2010, and GAAP net income for the full year was $13.8 million compared to $22.1 million in 2010. The 2011 decline in GAAP results were attributable to the effects of fair value changes on financial derivatives. Ultimately these fair value changes in financial derivatives are not expected to have a permanent effect on earnings or capital.

The results for the credit portfolio in both the fourth quarter and full year 2011 were influenced by a continuing strong ag economy and reduce demand for rural electric loans due to the slower overall economy. While the general economy remains sluggish, most ag sectors enjoyed solid results again in 2011. This resulted in a slight reduction in outstanding program volume for both Q4 and for all of 2011 with outstanding program volume at $11.9 billion as of December 31, 2011, which is down from $12.2 billion as of December 31, 2010.

That decrease in the overall volume was directly related to the maturity and repayment of a $475 million AgVantage security that was not replaced by new business.

Given that the muted demand for ag loans was a result of strong profitability in agriculture, I'm pleased that we continue to generate new business with both our current partners as well as many new customers. In fourth quarter 2011, Farmer Mac added $350 million of new program volume, bringing the total new volume for all of 2011 to $3.4 billion. That new business volume in 2011 was led by purchases of $1.8 billion of AgVantage securities, which replaced $1.5 billion of off-balance sheet AgVantage securities that matured during 2011.

In addition, we continue to show strong growth in both our Farmer Mac I and Farmer Mac II loan purchase business. The addition of this new business is obviously an important component to the growth of the Company. We continue to work with our customers to create new products and to find new ways to meet the needs of lenders, and ultimately, the producers.

Consistent with the continued strength in the Ag economy, delinquencies continue to decline. Farmer Mac's 90-day delinquencies were just $40.6 million or 0.93% of the Farmer Mac I portfolio as of December 31, 2011. And that is down from $70.2 million or 1.63% as of December 31, 2010.

Important to note here, no ethanol loans were delinquent as of the end of the year. And that compares to $10.9 million of ethanol loans that were delinquent a year ago.

Also, as we analyze the overall credit quality of our program business, we take into account more than just the agricultural loan delinquencies. The total program business includes AgVantage securities and Rural Utility loans, neither of which currently have any delinquencies, and also USDA guaranteed loans are backed by the full faith and credit of the United States.

When these are taken into consideration, the overall level of delinquencies in all of Farmer Mac's programs was just 0.34% as of December 31, 2011. That compares to 0.58% as of December 31, 2010.

We are pleased with the continued improvements in portfolio credit quality. And while any sector or individual large loan could impact these numbers, the results reflect our continued focus on disciplined underwriting and the recognition that credit quality is a key component to our long-term success.

With that as a background, I would like to turn the call over to Tim Buzby, our CFO, to cover our financial results in greater detail. Tim?

Thanks, Mike. As mentioned, fourth-quarter core earnings were $12.6 million or $1.16 per diluted share, up significantly from $6.7 million or $0.63 per share a year earlier. Core earnings is a non-GAAP financial measure that Farmer Mac uses to measure Corporate economic performance and develop financial plans. In Management's view, core earnings is a valuable alternative measure for understanding Farmer Mac's economic performance, transaction economics, and business trends.

This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of core earnings is not intended to replace GAAP information, but rather to supplement it.

The increase in core earnings during both fourth quarter and the year was primarily due to higher net interest income and overall reductions in the allowance for losses. Net interest income for the quarter exceeded $33 million compared to $26 million in fourth quarter 2010.

Higher net interest income was driven by on balance sheet program asset growth throughout 2011. We had expected our net effective spread in basis points for fourth quarter would be in the mid-90s, but it was actually a bit higher at 101 basis points. That figure is 6 basis points lower than the prior year. That decline was primarily attributable to the addition of lower-yielding assets in our liquidity investment portfolio.

Investments in the portfolio such as U.S. Treasury securities provide a source of contingent liquidity, but they produce a negative yield considering our cost of funds. The yield was also reduced by the $1.8 billion of new AgVantage securities.

While AgVantage securities provide significant dollars of net interest income, the yield is lower than the overall average across the rest of the portfolio due to the lower risk characteristics of AgVantage securities, mainly the over-collateralization of the securities and the strength of the corporate counterparties.

The second contributing factor to the higher core earnings in 2011 was the release from the allowance for losses of $2.3 million compared to provisions for losses of $4.3 million in 2010. That decrease is consistent with the overall improvement in portfolio credit quality. And as a result, the allowance for losses as of year-end was $17.5 million, down from $20.1 million at the end of 2010.

For fourth quarter 2011 GAAP net income was $13.3 million or $1.23 per diluted share, compared to net income of $12.5 million or $1.16 per diluted share for fourth quarter 2010. For the full year, GAAP net income was $13.8 million or $1.28 per diluted share compared to net income of $22.1 million or $2.08 per diluted share in 2010. All of these GAAP net income figures are affected by changes in the fair values of financial derivatives, which are primarily interest rate swaps.

Because of these financial derivatives, they're not designated in hedge relationships for accounting purposes. As changes in long-term interest rates affect the fair values of the financial derivatives, changes in fair value are recorded in earnings while much of the offsetting changes in the fair value of related assets and liabilities are not recorded in earnings.

These derivative fair value changes are expected to have no permanent effect on cumulative earnings or capital as held to maturity as it is expected. They can contribute significant volatility in periodic GAAP earnings, negating the value of period to period comparisons.

Farmer Mac's capital surplus above the statutory minimum capital requirement was $127 million as of year-end, up slightly from $125 million at the end of the third quarter. That increase is the combined effects of the GAAP net income for the quarter and the growth of on-balance-sheet assets which, based on Farmer Mac's statute, require a higher amount of capital than some of our off-balance-sheet guarantees or commitments.

More complete information on Farmer Mac's performance for the quarter and full year is set forth in the 10-K we filed yesterday with the SEC. With that, I will turn the discussion back to you, Mike.

Thanks, Tim. Both fourth quarter and year-end results reflect our continued efforts to position Farmer Mac to meet the needs of our customers over the long-term. While the current state of the ag economy and the strong liquidity position of many of our banking customers has impacted the short-term growth in net volume, our efforts to strengthen earnings and build a stable balance sheet continued to go as planned.

Of these last few years, for many segments of agriculture have been great for those producers. Having been around agriculture and rural America my whole life, I'm confident that current conditions will change.

Our goal is to continue to build Farmer Mac for the long-term, a strong balance sheet, consistent and healthy earnings, manageable credit quality, solid relationships with our customers and a bevy of efficient, effective products that meet the secondary market needs value of ag and rural customers, and rural utility lenders. All of that continues to be our focus.

These results continue to move us toward that goal, and we expect continued new loan volume to offset -- to help offset maturing volume and provide for ongoing earnings growth.

With our capital position significantly above applicable statutory and regulatory requirements, Farmer Mac continues to be a potential source of liquidity, capital and risk management to help lenders meet the borrowing needs of their customers. Farmer Mac remains well-positioned to meet the expanding demand for access to credit in rural America that is expected over time.

Recent doubling of our quarterly dividend on common stock underscores our confidence in Farmer Mac's future, and our commitment for volume-enhanced returns to shareholders over the long term, while at the same time fulfilling our mission of serving rural America.

We remain optimistic about the opportunities in front of us and we look forward to sharing those results with you.

At this time, I will turn the call back over to Emily and we'll be glad to take any questions you might have.

(Operator Instructions) We are showing that there aren't any questions at this time, so this does conclude our question and answer session. I'd like to turn the conference back over to Mr. Gerber for any closing remarks.

Okay, thank you again, Emily. And thank all of you for being on the call with us this morning. We appreciate the opportunity to share our results with you, and we look forward to doing so at the end of the first quarter. So, thank you again and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.